What is vendor finance?

Three kinds of vendor finance

Vendor finance is a method of borrowing money where the person selling you the property provides the finance for you to buy the property.

Instalment Sales – where you pay a deposit, move in immediately and pay instalments over a period, plus an extra fee to the vendor to cover rates and some bills for the property, until you own the property or can refinance with another lender

Rent to Own or Rent to Buy – where you pay a deposit, move in immediately and pay rent plus an additional amount on top of the rent that goes towards buying enough equity in the property to allow you to refinance with another lender

Deposit Finance – where the vendor lends you enough to top-up your deposit to the level required to qualify for a bank mortgage.

If you are considering entering into a vendor finance agreement it is worth having a conversation with a mortgage broker like Rob McDougall at Loan Market, Townsville.

What’s good about vendor finance?

  • Often the lenders are very motivated sellers, so they’ll provide finance on attractive terms
  • Vendor finance works for the vendor too – because they can borrow the money for the whole development at a lower rate than they charge you to buy your property, making them a small profit
  • The lending rules may be looser for vendor finance, creating an opportunity for you to buy even if you don’t qualify for a bank or finance company mortgage
  • The vendor may accept a lower deposit, giving you the opportunity to buy now, rather than keep saving
  • You may be able to negotiate payment terms that suit your lifestyle and income, rather than taking the standardised approach that the banks and finance companies do

Pitfalls of vendor finance?

  • With instalment sales and rent to own finance, the vendor may keep the title to your property until you have paid for it fully, or refinanced – which is fine unless the vendor goes bankrupt because your property can be sold so that the vendor’s remaining share in it can be used to pay their debts
    • Of course, the vendor’s share of the property could just be sold to you, if you can re-mortgage – that’s where having a good broker, like Rob, comes in handy

Why do I need a broker if the vendor is providing finance?

Most importantly, the broker represents you, so they will act in your interests, while the vendor will act in their own interests:

  • Vendor finance is still a finance product, so your creditworthiness needs to be assessed by a credit professional, and your broker can help you present yourself as well as possible
  • With products like Deposit Finance and Rent to Own, you will still need a mortgage – immediately for Deposit Finance and within a few years, usually, for Rent to Own
  • You need to know that you’ve got the best deal and a broker like Rob can help you find the best offerings in the marketplace to compare against
  • Talk to Rob McDougall if you are interested in buying a home using vendor finance.